Google CFO warns of slow growth, shares drop

Eric Auchard

NEW YORK: Google Inc. Chief Financial Officer George Reyes said advertising revenue growth is bound to slow, sparking a sell-off of as much as 13 percent in the Web search leader's volatile stock.

Reyes told an investor conference that Google's growth will depend on further audience gains or moves into new markets instead of relying on improvements in its mainstay Web search advertising business, which drives over 97 percent of sales.

"Most of what is left is just organic growth," Reyes said on a Webcast from the Merrill Lynch Internet Advertising conference in New York.

"Clearly our growth rates are slowing. We see that each and every quarter," he said. "We are going to have to find new ways to monetize the business."

Organic growth relies on factors such as overall Internet users or the number of Web search queries, instead of Google's own efforts to generate higher sales, like modifying its pay-per-click ad system to put more ads on search pages.

Google shares dropped as much 13 percent, or more than $50 in heavy trading, before recovering to trade down $29.625 at around $360.75 on Nasdaq late in the session.

Because Google, unlike most large publicly traded U.S. companies, has a policy of not commenting on its financial targets, its share price has reacted wildly to indications on its performance.

In late January, after Google reported disappointing fourth-quarter results, its shares fell as much as 19 percent.

Google shares started to bounce back on Tuesday after bullish analysts stepped up to defend the stock. Morgan Stanley, Goldman Sachs and Piper Jaffray analysts, among others, argued that Reyes' comments referred to long-term growth prospects and that investors had overreacted.

JPMorgan analyst Imran Khan in a note to clients said organic growth does not necessarily mean that Google's growth was subsiding in line with industry trends, noting that Google is gaining market share and its ad pricing is improving.

Reyes said the "law of large numbers," the statistical observation that growth rates tend to slow as numbers get bigger, was starting to drag on Google's prospects.

"I am not turning bearish at all," Reyes said in response to an audience member's question. "I think we have a lot of growth ahead of us. The question is: At what rate?" he said.

Ben Hunt, a buy-side analyst with Iridian Asset Management LLC, who watched the Google presentation, said Reyes introduced doubts at the last minute after an otherwise upbeat speech.

"I thought his comments were bullish until, at the very end, he said that because of 'the law of large numbers,' there is going to be challenges to their revenue growth rate."

The sudden drop in Google shares spurred wide selling in the 45-component American Stock Exchange Internet Index, which lost more than 3 percent.

Shares of Chinese Web search company Baidu.com Inc. fell 6.7 percent to $50651, online auction company eBay Inc. lost 4.1 percent to $39.57 and Yahoo Inc., fell 2.3 percent, to $32.00.

Tim Biggam, chief options strategist at Man Securities, a Chicago-based broker, said, "Any time you get a stock valuation based on future growth prospects, and those growth prospects as in the case with Google are tempered, you are going to see this sort of negative reaction in the marketplace."

Reyes' comments, which came two days ahead of the company's highly anticipated annual analyst meeting, were Webcast.

Piper Jaffray analyst Safa Rashtchy, who maintains a price target of $600 on Google shares, said Reyes' comments had been "misinterpreted" and the stock is likely to recover following the annual Google Analyst Day on Thursday.

"The CFO's comments that they are going to have to find other ways to monetize the business should be taken positively, as we believe that this indicates that Google will aggressively purse other revenue streams," Rashtchy wrote.

(Additional reporting by Kenneth Li, Euan Rocha and Ed Tobin in New York, Doris Frankel in Chicago and Peter Henderson in Los Angeles)